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Research and Development Relief, First-Tier Tribunal Decision

Hadee Engineering Co Ltd v Revenue & Customs (CORPORATION TAX - Research and Development (R&D) [2020] UKFTT 497 (TC) (10 December 2020)

Since publishing the below article, permission to appeal the First-tier Tribunal’s decision has been granted. The appeal will be heard by the Upper Tribunal.

The First-Tier Tribunal have recently published their decision in the case Hadee Engineering v HMRC. It covers a number of aspects relating to R&D claims, from both a legislative perspective as well as the practicalities of making a claim. There is limited case law relating to R&D tax relief and therefore, whilst the exact fact pattern of the case is unique to the taxpayer, it is worthwhile reflecting on the decision. The case serves as a useful reminder of the requirements that must be satisfied to submit a valid and supportable R&D claim.

Overall, the theme is one of good governance and record keeping. Of particular note:

  • A focus in the decision for the claimant to have a robust and auditable methodology. In particular, the evidence for how the project meets the R&D eligibility criteria and the methodology adopted to arrive at the apportionment to quantify the claim. This evidence should be well documented.
  • Even though an individual may have a technical role within an organisation this does not mean they will necessarily have the skillset required to assess all projects included in a claim. It is therefore necessary to bring in the right level of expertise to undertake the assessment.
  • A need for the ‘project’ to be clearly defined and articulated. It is necessary to demonstrate to HMRC where the R&D projects start, the point at which R&D costs can be claimed, and where the project ends.
  • A requirement to keep good contemporaneous evidence in respect of the underlying expenditure incurred. It is important to have the evidence available to support the claim and respond to HMRC in a timely manner should any queries be raised. There are also a number of conditions in the tax legislation that must be satisfied for a company to make an R&D claim. A claimant must ensure that all qualifying conditions are met before submitting its claim for R&D tax relief.
  • A need to understand the nature of any relationships with third parties. Interaction with third parties can impact R&D claims in a number of ways from who is funding the R&D (customer and grant-funded projects are excluded from claims under the SME regime), to who is performing the R&D (in-house or sub-contracted, with subcontractor costs only claimable under the RDEC regime in limited circumstances).

The decision reinforces the two key phases in preparing R&D claims. Firstly, understanding how the R&D work meets the R&D eligibility criteria as set out in the BEIS guidelines with the involvement of the most relevant technical project leads. Then once eligible R&D activities have been identified, ensuring the conditions set out in the tax law are met and there is good record keeping.

The tribunal decision is not final and could be appealed.

The case highlights some of the complexities of the regime and where professional input may be beneficial. In this respect, and in recognition that R&D tax advice is a very specialist area of work, the Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT) published guidance in June this year regarding the application of Professional Conduct in Relation to Taxation (PCRT) to R&D tax credit services. Supplementing these standards, both bodies have recently issued further guidance on how to choose a specialist R&D advisor. The guidance (which can be found here: CIOT / ATT ) sets out the things companies should and shouldn’t expect from an R&D provider.


The case online, it’s now available to the public via BAILII here (PDF) or here (HTML)

The information contained in this article is intended to provide general information only and is not an exhaustive treatment of the subjects. Accordingly, the information in this publication does not constitute accounting, tax, legal, investment, consulting or other professional advice or services. Before making any decision or taking any action based on the information contained in the publication, you should consult a qualified professional adviser.

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